During tax season, many Canadians reassess their financial strategies. Reviewing your income, your taxes, and the tax write offs allows you to look at the bigger picture for how you can make changes going forward.
One of the easiest tax shelters that the CRA provides is through the use of Registered Retirement Savings Plans (RRSPs) and in the last few years the Tax Free Savings Accounts (TFSA). Each one has their own advantages and are used individually or in tandem depending on your income range and projected retirement income.
In the chart below you’ll see the income tax rates for each taxable income range. This gives you an idea of the amount of tax you’ll be paying to the CRA unless you’re able to decrease your taxable income through RRSP purchases. For each dollar in RRSP purchases you can save 31.15% at a minimum once your income is over $44,700 in 2015.
When it comes to RRSP contributions. It’s best to pay yourself first and automatically have the RRSP purchases withdrawn from your bank account on a monthly or bi-weekly basis so you don’t even miss having the cash. Paying yourself first is a lot easier than scrambling for the RRSP funds at the end of February to meet the spring deadline.
So doing RRSP's monthly is a great way to reduce your income taxes and you should set up a monthly contributions to a plan now.
TFSA- Tax Free Savings Account
This should be used for those individuals that have maximized the RRSP's and don't want to pay tax on the interest, dividends, or capital gains earned in this account or low income individuals with high net worth. At $36,500 the current maximum contributions allowed for 2015 for residents of Canada since 2009 and those born in 1991 or prior. Please note if you turn 18 this year, you can only contribute $5,500.00.
The TFSA can hold stocks, bonds and other capital products. You likely want to put in blue chip stocks that don't decline in value as capital losses in a TFSA can't be used personally. So growth and capital gain items and lots of dividends and interest are what you want in a TFSA.
Lastly, this is really not to be used as a daily savings account, as all deposits in are tracked and you are limited on the deposits annually to the overall amount allowed. So please let the funds stay in the account with little movement out is recommended. If you have to withdraw a large amount in an emergency, you need to wait until January 1 of the following year to replenish the tax free savings account back to the maximum allowed. The next Federal budget may add some more contribution room and keep you posted on the new limits for 2016.
Notice to Reader - Warning and Disclaimer
This monthly update was prepared on February 27, 2015.
When considering any of ideas from this article, please contact the writer directly before acting on them. This will ensure that any information has been updated.
Without contacting the writer before implementing any of these items you will bear all the responsibility for any tax assessments and or business issues that may arise from this information.
Copyright @ 2015